Housing advocates seek adjustable subprime loan

With home prices rising, interest rates falling and builders building, some prominent housing advocates are calling for a new kind of loan for buyers with lower incomes or bad credit.

With home prices rising, interest rates falling and builders building, some prominent housing advocates are calling for a new kind of loan for buyers with lower incomes or bad credit.

They would like to call it the Dignity Mortgage, but it has another name - one that has become more of an epithet since the housing crash: subprime.

Applicants might include people caught in the early stages of the mortgage meltdown who have since rebuilt their finances, said Faith Bautista, who heads the National Asian American Coalition.

"They lost their work, their homes and their credit scores four or five years ago," Bautista said.

Since then, she said, many have found new jobs and saved up enough for a 10 percent down payment. But they can't get a loan because lending standards remain tight - even for the Federal Housing Administration mortgages designed to help lower-income borrowers.

The proposal starts with the classic subprime trade-off: a higher rate for a higher-risk clientele. Borrowers would pay 1.25 percentage points above the going interest rate.

But the deal would get better if borrowers made timely payments for five years. At that point, the extra money they had paid in interest would be used to reduce the mortgage balance, and their rate would be cut to whatever borrowers with sterling credit and 20 percent down payments were charged at the time the loan was made.

Pattie Sibug of San Diego is among those who got caught short by the housing crash. By early 2010, the property-improvement company she and her husband had owned for a dozen years had already seen its business fall off. Then a stream of work repairing foreclosed homes for a big bank dried up.

BID Construction wound up owing suppliers about $60,000 that it could not repay, which ultimately ruined the couple's personal and business credit scores. Sibug and her husband, Ollie, would like to buy the town house they are renting for $1,750 a month, and could come up with a 10 percent down payment. But they had to decline the owner's recent offer because they knew they couldn't get financing.

"There's got to be some kind of program to help you re-establish yourself," Sibug said. "I'd be the first person in line if there was."

Situations such as hers are why Bautista and other activists have been talking to bankers and regulators, proposing the new type of loan.

The proposal comes as home lenders remain besieged by demands that they pay billions of dollars in damages for defaulted housing-boom loans. Regulators have required banks to increase reserves against losses.

And the lenders also are evaluating new mortgage rules from the Consumer Financial Protection Bureau that they say will determine how freely they can lend.

In reaction, many banks have imposed higher standards for writing new home loans than those required by the FHA or by Freddie Mac and Fannie Mae.

One credit officer called the Dignity Mortgage proposal "a stupid and crazy idea - a poison pill" in light of the previously lax lending practices that many experts think spurred the foreclosure crisis.

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